Is A 1987-Type Stock Market Crash 3 Days Away?

If you’re feeling uneasy about the S&P 500 — you’re not alone. Investors are nervous that stocks are following the same pattern that preceded a 1987-type crash on Oct. 19.

X

What does the S&P 500 in 2023 share with this point in 1987? Plenty. A strong start to the year? Check. A sell-off in the third quarter on weak stock breadth? Yes. “Additional similarities include rising interest rates, underperformance by rate-sensitive sectors and a strong dollar,” said Ed Clissold, chief U.S. strategist at Ned Davis Research, in a report. “The similarities are glaring.”

“Several clients … have asked whether the market is setting up for another 1987-type event,” Clissold said.

Reasons To Worry About S&P 500

It’s natural  for investors to fret about an October crash. The month is known as the “jinx month” for a reason, says the Stock Trader’s Almanac.

There’s no shortage of massive crashes in the month. That includes huge drops in 1929, 1978, 1979, 1989, 1997, 2008 and of course the infamous 1987 “Black Monday,” the Almanac says.

What’s more, the market has followed seasonality trends all year, including a dismal September. “Worries are climbing that we could be due for another October crash,” said Ryan Detrick, chief market strategist at Carson Group, in a tweet.

2023, 1987: Similar But Different

But despite the ominous similarities, neither Detrick nor Clissold expect history to repeat itself this year.

Clissold first points out that the S&P 500 was more “overbought” in 1987 leading up to the crash than it is now. Additionally, interest rates were higher in 1987, economic growth and inflation ran hotter, and more sectors of the S&P 500 tied most closely to the economy were outperforming than now.

What’s more, a number of market structures that exasperated selling in 1987 aren’t a risk now. That includes portfolio insurance as a way to gird against losses. Meanwhile, “circuit breakers” are now in place to make a 20% drop in the S&P 500 like the one on Oct. 19, 1987, all but impossible.

Finding Differences In S&P 500

Drilling down on the similarities shows how different they actually are. For one thing, investors like to line up year-to-date charts of the S&P 500 for 1987 and 2023. And yes, at a quick glance there are similarities.

Both years, the S&P 500 rallied into the summer, largely relying on a handful of stocks. And the percentage of winning stocks continued to dwindle in the third-quarter sell-offs in both years.

But that’s where the similarities stop, Clissold says. For one thing, the S&P 500 jumped more than 39% through the August 1987 high. That’s nearly double the S&P 500’s 20.5% rise until peaking on July 31, 2023.

The economies of 1987 and 2023 are very different too, Clissold says. Growth in the economy and inflation is much lower in 2023 than it was in 1987.

“While there are several high-level similarities, not enough line up to conclude that a crashlike event is likely,” Clissold said.

1987 All Over Again For S&P 500?

There are some eerie similarities leading up to the 1987 crash and what’s happening now:

Source: Ned Davis

Follow Matt Krantz on X (Twitter) @mattkrantz